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6 Things That Should Be in Every Supply Agreement

One of the most common questions with commercial agreements I get is: What should my supply agreement contain?  While the real answer is that it depends on your product, industry, and supply chain, there are some topics that have to be addressed.

Inspection/Rejection

This is one of the most important topics for suppliers and buyers especially where there are many orders over a long period of time.  Key questions include:

  • What duty does the buyer have to inspect the product?
  • How will the buyer determine whether a product is defective?
  • How long does the buyer have to inspect the product?
  • Who will do the testing to determine if the product is defective (buyer, supplier, or neutral 3rd party)?
  • If a product is defective what happens to the product?
  • What obligation does the supplier have to fix the problem?
  • If the supplier has to fix the problem, what will be required?

Warranties

Suppliers will tend to want to narrow the scope of warranties they provide the buyer.  Nevertheless, the buyer should consider the following issues:

  • Should the supplier have to confirm compliance with any manufacturing standards (for example, cGMP or FDA)?
  • Should the supplier have to warrant the shelf life of the product?
  • Should the supplier have to warrant the accuracy of the labels and invoicing?
  • Should the supplier have to warrant that the product is safe for use, non-toxic and manufactured in compliance with all health and safety laws?

Recalls

The main questions to address are:

  • Who gets to decide to initiate a recall?
  • Who has the right to notify regulatory authorities?
  • Who bears the costs of the recall?
  • How will fault be determined in the recall?

Indemnities

Suppliers will want to limit the indemnification they provide to the buyer to cover the narrowest set of circumstances.  Buyers will want the supplier indemnification to be very broad.  The parties need to address the following issues:

  • What costs and expenses will be covered by the indemnity?
  • Will the indemnity be mutual or unilateral-from supplier to buyer only?
  • Will there be a cap on the indemnity?
  • Will the indemnity include expenses related to a breach of warranty?
  • What standard of liability will apply to the supplier? Negligence?  Gross negligence?

Force Majeure

Commercial agreements often have a force majeure clause that details what happens if there is an act of God, disaster, etc.  In the COVID-19 era it is important for the parties to determine whether the coronavirus is something that should be included or excluded from the list of excusable events.  Regardless of the answer to that the parties need to answer the following:

  • How much detail must the party give with respect to the event causing a suspension in performance?
  • How long is the suspension in performance in force?
  • Will the performing party be able to terminate the agreement?
  • When will the performing party be able to terminate the agreement?

Dispute Resolution

Given the closure of many courthouses parties are advised to be thoughtful about how they resolve their disputes.  Mediation and arbitration can be more attractive options for parties given the relative slowness of civil litigation now and when courthouse open fully.  The parties should consider:

  • Do they want to exclude civil litigation and/or jury trials?
  • Do they want to mandate mediation before anything else?
  • Do they want to mandate arbitration?
  • What forum do the parties want to use-where the supplier is located or where the buyer is located?

While there are no guarantees, parties that think through the foregoing will be in a better position to deal with the inevitable issues that come up in supply agreements.